Iran Pulse

Why the Iranian government must modernize its cash management system

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Article Summary
The Rouhani administration ought to modernize its cash management with a Treasury Single Account to combat corrupt practices, eliminate a lack of discipline in public finance and ensure adequate fund flow to critical sectors of the economy.

Managing and controlling the government’s cash resources has long been a major challenge to the implementation of budget laws and oversight of the government’s receipts and payments from and to a diverse number of state and nonstate agencies and entities in Iran. Fragmented government banking arrangements, coupled with various loopholes in the relevant laws, have prevented the Ministry of Economic Affairs and Finance of Iran’s Treasury Unit from improving budget control and the quality of fiscal information.

The International Monetary Fund has advised a Treasury Single Account (TSA) as a prerequisite for modern cash management. The TSA is a process and tool that unifies all government accounts for the effective management of its finances, bank and cash position. It is an objective that the Treasury Unit has sought to fulfill for years, without much success.

Despite President Hassan Rouhani’s unequivocal decree to all state-owned enterprises to block their accounts in financial institutions and transfer them to the Central Bank of Iran, reports indicate that they are still evading the law. Although the violation of the law is regarded as unlawful seizure of public property, many of them are unwilling to shift their accounts, particularly their earnings accounts, into Treasury accounts with the central bank. Of note, there were about 220,000 government accounts before Rouhani’s first term in office (2013-2017). Currently the number has dropped to 70,000, meaning there is a long way to go for the government to fully manage its cash resources and execute fiscal policies properly.

In the fourth Five-Year Development Plan Law (2005-2009), the state agencies, institutions, para-governmental organizations and municipalities were authorized to select which banks would operate their banking transactions. The purpose behind this erroneous decision at the time was to provide a healthy, competitive environment in the banking system of the country to undermine monopoly and help economize the activities of newly established banks. This authorization was a major breakpoint in the maintenance of government accounts, as it made the Treasury's job quite difficult. The Treasury needed to pool together the positions of different state agencies to help it gain an overall picture of the government’s cash flow. Interestingly, this law was approved in the two years since the establishment of the country's first private bank.

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According to experts, one of the most important reasons many para-governmental institutions have been able to own private banks is due to the public funds they received, thanks to allotments granted to them in their annual budgets. This is why maintenance of such an immense amount of cash should legally be under sole supervision of the central bank. Furthermore, the maintenance method of para-governmental entities accounts does not meet any clear criteria. Information concerning their accounts is based firstly on the self-declaration report of the banks. Secondly, the chances are high that many banks could fail to accurately calculate the accounts of these institutions due to the lack of a clear definition of such entities.

Also, the removal of a few big companies' accounts from being included in the TSA is another grave mistake in this regard, since those the excluded are among the most revenue-generating state-owned enterprises. This unjustifiable exception is apparently in breach of the purpose of such an immense national scheme. The National Iranian Oil Company, National Iranian Gas Company, National Oil Refining and Distribution Company of Iran and National Petrochemical Company are among such state-owned enterprises being exempted.

According to a report by Iran's Parliament Research Center in 2015, statistics over the past several years indicate that the ratio of the government's general budget to the liquidity had been almost 50%. Thus, it is natural that the circulation of such a huge amount of money in the banking network — in the absence of effective central bank supervision — would bring significant benefits to the financial institutions, ruining the future outlook for the real economy. Nonetheless, this has exacerbated banks' rent-seeking behavior as well as those of the government agencies. The provision of special privileges and services as the issuance of credit documents and bank guarantees by the banks to their own affiliated firms, in exchange for granting large loans to state entities executives, are among instances of such unlawful demands in this regard.

In compliance with the public funds concentration bylaw, the balance on the accounts should be transferred to the TSA in the time periods determined by the Treasury depending on the amount of the account balance, the Treasury's need and other factors. But such delay in the transfer would reduce government access to its required cash resources and slow down performing its obligations in the economy. In the era where e-banking technology has been highly developed and many core banking operations can be carried out at a rapid pace, such delays are out of place.

For various reasons, including online monitoring, operational and transparent budgeting, preventing budget deficits, halting delay in servicing state obligations, and undercutting the rentier system, all public revenues should be deposited in the TSA. This is so important that Article 53 of the Constitution of the Islamic Republic of Iran has also highlighted it. Having access to timely information on government revenues plus their optimal allocation to relevant infrastructure projects and current expenditure could help the Rouhani government administer its executive duties appropriately.

Nevertheless, it seems that the implementation of this initiative will continue to prove difficult. Since it is common practice for some managers of state agencies to abuse government accounts for personal advantage, the transfer of para-governmental entities accounts to the TSA seems to be a tall order. Thus, there needs to be a strong political will to secure such a grandiose project. But should the fourth phase of the plan to concentrate all fragmented accounts be fully implemented, the bankruptcy or merger of a number of private banks connected with these bodies will not be beyond the realm of possibility.

In sum, the TSA is a tool to combat corrupt practices, eliminate a lack of discipline in public finance and ensure adequate fund flow that will be channeled to critical sectors of the economy to catalyze development. Additionally, its implementation appears to induce better governance in addition to having other financial benefits for the government.

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Navid Kalhor holds an MSc in finance from Azad University and earned a BA and MA in English literature from Allameh Tabataba’i University. He has worked in the Iran Mercantile Exchange and the Tehran Stock Exchange as a trader and equity research analyst for different brokerage firms. On Twitter: @navid_kalhor

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